CHINA DEEPENS ITS ECONOMIC INFLUENCE IN INDONESIA

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 002073 SIPDIS STATE FOR EAP/MTS STATE ALSO FOR EEB/ESC/IEC/ENR, EAP/CM COMMERCE FOR 4430 NADJMI AND 6930 ENERGY FOR PI-32 CUTLER STATE PASS TO USTR EHLERS AND WEISEL E.O. 12958: DECL: 12/10/2019 TAGS: ECON EINV EFIN ETRD EMIN EPET PGOV ID CH SUBJECT: CHINA DEEPENS ITS ECONOMIC INFLUENCE IN INDONESIA Classified By: DCM Ted Osius, Reasons 1.4 (b) ¶1. (C) Summary. China is deepening its economic influence in Indonesia, through major deals in energy and resources, as well as the impending entry into force of the China-ASEAN Free Trade Agreement on January 1. Bumi Resources, Indonesia's largest coal miner and owned by the family of Golkar chief Aburizal Bakrie, has entered into a financial relationship with the China Investment Corporation that will expand China's influence in Indonesia's mining sector. This arrangement represents a new approach to China's traditional low-key investment in the mining sector. Business groups are becoming uneasy about Chinese competition under their FTA, although the government has resisted calls to alter any of the FTA's provisions. China's economic engagement has some positive effects, such as a currency swap early in the global financial crisis. End Summary. Bakrie Opens the Door to China -------------- ¶2. (SBU) The Bakrie Group's flagship company Bumi Resources has taken a big step closer to China. The company announced on September 23 that it would borrow $1.9 billion from the China Investment Coporation (CIC),China's sovereign wealth fund, to finance new acquisitions and shore up outstanding debt. This new loan is through a "debt-like instrument" that is reportedly secured by shares in Bumi's two largest mines, KPC and Arutmin. ¶3. (SBU) As details emerge, it has become clear that the CIC-Bumi deal will operate more as a partnership than a standard debtor-creditor arrangement, similar to other Chinese companies' goals of investing in resource extraction companies worldwide. CIC reportedly will get some shares of Bumi outright, options to buy more, and the right of first refusal to partner with Bumi on any new acquisitions. Bumi's new cash infusion has allowed it to go on a buying spree for natural resource companies. Bumi has recently paid or pledged billions of dollars to be primary investors in a number of acquisitions, including PT Newmont Nusa Tenggara, Berau Coal in East Kalimantan, and an offer to buy BHP Billiton's stake in the Maruwai coal mine project, as BHP liquidates its holdings in Indonesia. Clouds on the Horizon? -------------- ¶4. (SBU) But Bakrie financing is notorious for its lack of transparency and stability, and it is unclear how the CIC deal will fare in the long run. Bumi's debt may reach 150% of equity by the end of the year. In addition to the CIC deal, Bumi has made bond offerings of over $800 million over the past several months, whose terms are unknown, although interest rates are reported to be 12% or more. These bond offerings have triggered Bumi share price declines, as investors worry about the level of outstanding debt. With primary assets reportedly securing the CIC debt, it is unclear how Bumi and the Bakrie Group will prioritize outstanding commitments in the event of financial problems. Bakrie has faced two severe financial crises in the past, once following the Asian financial crisis of 1997-1998, and again in 2008, following the decline in commodity prices. In both cases, minority shareholders and creditors suffered significant losses. ¶5. (C) China's aggressive defense of its commercial interests has already caused problems for Indonesia. In February 2009, China cut off concessional financing from the China ExIm Bank for a large-scale Indonesian electrical plant construction program in response to Indonesia's cancelation of an airplane purchase contract. Chinese firms are constructing 32 of 35 power plants under an accelerated program to ease Indonesia's critical electricity shortage. China's withdrawal of ExIm financing slowed down the program, adding to public dissatisfaction with power sector officials. Former Energy Minister Purnomo Yusgiantoro stated earlier this fall that Indonesia needs to "balance" China with other foreign investors. Growing Trade Ties Cause Concern JAKARTA 00002073 002 OF 002 -------------- ¶6. (SBU) The deepening partnership on natural resources is merely one facet of expanding Sino-Indonesian bilateral economic engagement. The China-ASEAN Free Trade Agreement, due to enter into force January 1, 2010, will expand the range of trade and investment between the two countries by lowering tariffs. China is aggressively pursuing Indonesian markets for manufactured goods, heavy equipment, and infrastructure development services, although it has not sought to invest in manufacturing. ¶7. (SBU) Indonesian business is worried about increased competition following China's new market access. The government has resisted domestic business demands that it delay FTA implementation, but the Finance Ministry announced on December 15 that it would seek to restore current tariff levels on 314 product categories through a renegotiation. Indonesia is also considering new anti-dumping legislation again directed at Chinese practices. Indonesian Government Sees Benefits -------------- ¶8. (SBU) Parts of the economic relationship are clearly a benefit to Indonesia. The Chinese government was quick to offer a currency swap at the onset of the global financial crisis in 2008, when the Indonesian economic position was precarious. Although the actual utility of the swap is questionable, it was seen as a political show of support for Indonesia. China's continued robust imports of key raw materials during the global recession has also helped Indonesia maintain positive economic growth. ¶9. (C) China's interest in resource extraction industries also helps officials with internal politics, despite a spike in Indonesian resource nationalism. Chinese investors have expressed enthusiasm for investing in Indonesian mining projects under the new mining law, according to Indonesian officials. Mining officials, eager to demonstrate successes under the new law, often point to this interest to counter Western mining companies' concerns that the new law's provisions -- such as mandatory in-country smelting and local content requirements -- are onerous and will lead to decreased mining investment. HUME